Editorial: Meddling with mortgages

2013-01-30 16:50:06

Desperate situations sometimes spark desperate solutions. Fortunately, the county of San Bernardino and two of its cities, Ontario and Fontana, have decided to shelve a proposal to clear out so-called underwater mortgages by using the government's eminent domain powers.

As described by the Wall Street Journal, "Under the eminent domain idea, as advocated by San Francisco-based Mortgage Resolution Partners, a municipality would strip underwater loans from mortgage securities at a discount to the home's value, with money from private investors. The loan would then be refinanced through a government program to cut principal slightly below the property value."

The scheme was supposed to benefit municipalities while clearing out bad mortgages, supposedly improving the housing market. But the problems were clear. Eminent domain, government's power to seize private property after compensating the owner, is supposed to be used only for clear government objectives, such as acquiring land for a road or school.

Abuse of eminent domain was a major reason we cheered in 2011 when Gov. Jerry Brown and the Legislature abolished the state's local redevelopment agencies. Some of these agencies were declaring as "blight" even decent homes and businesses, seizing the property, then turning it over to influential developers.

The mortgage scheme also effectively would have made the municipalities real estate speculators. It would have created a joint powers authority, a new government bureaucracy, to administer the scheme. And JPA meddling, like most government actions, might have lowered the values of the affected properties.

As quoted by Bloomberg News, a warning came from eminent domain expert Gideon Kanner, a professor emeritus at Loyola Law School. He said, "If you make a reduction in loan balance available, whether by eminent domain or otherwise, these people [facing foreclosure on their homes] will be provided with a powerful incentive to stop making payments on their mortgages, hoping to get bailed out by the government."

Meanwhile, the real estate market has finally started recovering in the Inland Empire. "In San Bernardino County, the median price increased to $180,000 from $150,000 a year ago," the Inland Valley Daily Bulletin reported Jan. 15. "Riverside County's median price rose to $231,000 from $194,000."

The aftermath of the deflated housing bubble stressed homeowners almost everywhere, although especially so in the Inland Empire. But the free market and long-tested bankruptcy procedures are the sensible ways to purge problem mortgages. With the demise of this scheme, let's hope this burst of common sense spreads throughout the state.